Question

Hi Tech Corporation (HTC) expects to order 295,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $375 per order; the purchase price per chip is $32; and the firm’s inventory carrying costs is equal to 18 percent of the purchase price. What is the economic ordering quantity for chips?

HTC is able to negotiate a reduction in the fixed ordering costs to $250.00 per order, but HTC decides to carry a safety stock of 21 days of memory chip sales. With the reduced fixed ordering cost and the increased average inventory due to the safety stock carried, what is the additional total inventory costs due to the decision to balance out uncertainty by carrying the specified safety stock?

Answer 1

Company name- Hi Tech Corporation (HTC)

1.) Calculation of Economic Order Quantity

Ordering Quantity -

Fixed Ordering Cost per order -

Purchase Price per chip -

Inventory Carrying Costs- ^%

Economic Order Quantity (EOQ)

^%

  

2.) Calculation of Additional Inventory Costs

Calculation of Total Inventory Costs ( Before Proposal)

Purchase Cost

  

Ordering Cost

Number of Orders

Hence, Ordering Cost

Carrying Cost

Calculation of Total Inventory Costs ( After Proposal)

Purchase Cost

Ordering Cost, where, ordering cost per order reduced to 250

Safety Stock